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Aether stock drops after analyst downgrades

    Aether Systems fell 13 percent Wednesday after some analysts cut their ratings and estimates on the heels of the company's fourth-quarter report.

    Shares in the provider of wireless data services were down $3.97 to $32.88.

    Aether (Nasdaq: AETH) reported revenue of $25.8 million and a loss of 90 cents a share in its fourth-quarter report Tuesday, beating First Call's estimated loss of $1 a share. The company attributed the upside in revenue to the addition of acquisition revenue as well as good performance on its overall business.

    On a conference call Wednesday, the company said it expects a far wider 2001 loss than Wall Street had projected as it increases investments to reach profitability sooner. It now expects positive earnings in the third quarter of 2002, two quarters earlier than it had previously thought.

    Aether Systems has historically relied on growing revenue through acquisitions, and following growth projections on the Wednesday call, analysts began to question by how much the acquisitions are hiding lackluster performance in its core business.

    The raising of the company's guidance gives credence to this worry, since a significant chunk of the higher guidance is a result of revenue from acquisitions.

    C.E. Unterberg, Towbin analyst Jason Tsai downgraded the stock to "neutral" from "buy" and lowered his 12-month price target to $50 from $108 on worries about the company's core growth prospects.

    "Concern surrounding organic growth still lingers," Tsai wrote in a research report. He also said the company is having a more difficult time integrating its string of acquisitions than anticipated, "hence the lower gross margins and higher operating expenses."

    Robertson Stephens analyst Marianne Wolk downgraded the stock to "long-term accumulate" from buy and said that it could be hard for the company to top its guidance of $180 million in revenue for 2001 given the tough economic environment.

    "We also find the large buildup in operating expenses over the next to quarters...may be difficult to reduce by mid-2002 and believe break-even results are more likely in 2003 than the company's 2002 target," Wolk wrote in a research note.

    The analyst also noted than the expiration of a lock-up period on 18 million of the company's shares Feb. 24 could put some near-term pressure on the stock.

    Deutsche Banc Alex Brown analyst Bo Fifer was more optimistic, calling the company's outlook "great" and maintaining a "strong buy" rating.

    Positive developments in the fourth quarter outweigh any perceived negatives, such as the expiration of the lock-up period, Fifer said. These developments include stronger organic and overall growth across all revenue segments, customer wins for both subscription and licensing products and the company's revised outlook.

    "While some investors may key in on the increased...loss forecast in 2001, given the strength of Aether's balance sheet ($875 million in cash) we believe the decision to increase spending in the short run to target incremental revenue opportunities is prudent," Fifer wrote.